MaRS Library Exit strategy planning: IPOs, mergers and acquisitions and licensing
You do not have any control over when your company will exit. As an early-stage company, you should focus on building a great organization. The marketplace is very fickle—companies that would have been acquired last year might not be able to get meetings with potential acquirers this year. It is important, then that you consider exit strategy planning.
Common exit strategies involve:
- An initial public offering (IPO) on a public stock exchange (for example, TSX, NASDAQ)
- A merger and acquisition (M&A) with a player in your sector. The acquisition can be either for cash, stock or a combination of both.
Initial Public Offering (IPO)
In challenging economic times, it can be very difficult for early-stage companies to go public and raise financing through the public markets. Most venture-backed exits have occurred via M&A. Visit Canada’s Venture Capital & Private Equity Association (CVCA) and the National Venture Capital Association (NVCA) for the most recent Canadian and U.S. statistics on financing and exits.
Mergers and acquisitions
Thinking about potential acquirers will help you to identify partners for your business. In fact, merger and partnership (M&P) is becoming more prevalent than M&A. Partners can provide your company with a cash infusion in exchange for a “look-see” into your business. Once you scale the business and become strategic to their company, one of these partners might put an offer on the table.
If your venture is not successful, you may be forced to sell your company for less than you expected. This may include licensing a portion of your technology or selling the intellectual property (IP) to recover as much value for the shareholders as possible.
Key tips for exit strategy planning
- Follow-on investors and investors looking to partner or acquire your company will conduct due diligence on your organization. Make sure that you continue to maintain your books, records and due diligence binders.
- If the public markets are open to early-stage companies, then get out there early on and meet the investment bankers and equity analysts who specialize in and cover your sector. They can help you to determine if your organization has what it takes to raise financing on the public stock exchange. You also have to make sure that you meet the eligibility requirements.
- Remember that an IPO is not necessarily an exit for your investors. Your investors’ shares tend to be locked up for a period of time—typically six months. As well, early-stage public companies have low liquidity. Therefore, once your investors are no longer locked up, they may not be able to find a buyer for the shares.
- You will likely need to engage an intermediary to facilitate an IPO or sell your company. Get recommendations and introductions from advisors, lawyers and accountants to identify the respected agents and bankers in your sector.
TSX listing requirements. Retrieved April 13, 2009, from http://www.tsx.com/en/pdf/TSXandTSXVenture_IndustrialRequirements.pdf.
NASDAQ listing requirements. Retrieved April 13, 2009, from http://www.nasdaq.com/about/nasdaq_listing_req_fees.pdf.
- Value proposition: A reflection of the relationship between your customer and brand.
- The MDSC (market development strategy checklist)— providing strategic direction for startup go-to-market programs.
- Startups and intellectual property (IP): What tech investors look for.
- Education technology.
- What do funders and investors want from social enterprises?.